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Interesting research that up to 30% of the cost of a car is the inefficient distribution network:
"..the logistics of distributing cars is actually a very expensive part of the process. Research by Eric Marti, Garth Saloner, and Michael Spence has concluded that as much as 30 percent of the cost of a car is the cost of distribution.
"But as Gerald Bodish wrote in a 2009 analysis from the US Department of Justice, the most expensive part of the whole process is hiding in plain sight — it's the stockpiles of unsold vehicles sitting around on dealers' lots. He observes that in late 2008, there was a staggering $100 billion worth of unsold dealer inventory, with an annual carrying cost of $890 million.

I'm imagine Tesla is looking at some sort of dealership model as a growth strategy. I'm sure it would be fixed price. It is enormously difficult to manage and motivate a worldwide sales and support effort. Having the right local ownership is why franchising works.

It is a question of Tesla aligning their goals with the goals of a local owner. Especially in compensation.

I'm imagine Tesla is looking at some sort of dealership model as a growth strategy. I'm sure it would be fixed price. It is enormously difficult to manage and motivate a worldwide sales and support effort. Having the right local ownership is why franchising works.

It is a question of Tesla aligning their goals with the goals of a local owner. Especially in compensation.

Click to expand...

My experience with local owners is that they will do anything to sell you what they have on the lot even if it's not even close to what you want.
The only goal of the local owner is to make as much money as possible. He (and it's always a he) doesn't care about the brand or customer satisfaction or service.
The Tesla "pre-order" model is much better.

My experience with local owners is that they will do anything to sell you what they have on the lot even if it's not even close to what you want.
The only goal of the local owner is to make as much money as possible. He (and it's always a he) doesn't care about the brand or customer satisfaction or service.
The Tesla "pre-order" model is much better.

Click to expand...

When I was purchasing a vehicle that had very specific towing requirements (I had to be able to pull at a rating of 10,000lbs), the first dealer I went to lied about the specs of the on-lot truck. I was skeptical, so I crawled under the vehicle to check, and it was the wrong axle and tow hitch. I went to a second dealer and they lied about the towing capacity of the engine. A third dealer lied about yet another spec... all of this was to get me to buy a vehicle from the lot rather than use an online builder that would guarantee me a 3.92 axle, a class C hitch, and a 10k tow rating.

I would have gone straight to the online builder but, in a bizarre set of coincidences, the online build-your-own tool refused to allow me certain combinations of options. Ended up driving 150 miles to get one out of a wholesaler's lot with 500 miles on it. Hilariously enough, a car dealer had sold them the truck to get it off their lot.

Car dealerships are legalized con artists and I look forward to never having to deal with one ever again.

I'm imagine Tesla is looking at some sort of dealership model as a growth strategy. I'm sure it would be fixed price. It is enormously difficult to manage and motivate a worldwide sales and support effort. Having the right local ownership is why franchising works.

It is a question of Tesla aligning their goals with the goals of a local owner. Especially in compensation.

Click to expand...

Though this isn't the Investing forum, I have an investing take on this issue. I believe that the core of Tesla's present competitive advantage in the marketplace is that Tesla's buyers are also the people that consume their product. Tesla sells directly to consumers who use their cars. Tesla's incentives are fully aligned with consumer's incentives.

It sounds trivial, but this isn't true for the rest of the industry. GM's customers are car dealers - GM's consumers are the car dealers customers. And that leads to misaligned incentives - GM (and of course, equally true for the other makers) is incented to make their customers happy - the car dealers. As long as the car dealer and end consumer interests are in alignment, then there are no issues with this model, and I'm willing to believe that 50-100 years ago when the car industry was getting started, this was true. Today I am persuaded, those interests are not in alignment, and that puts the other car makers into a trap - build vehicles that consumers want, and your customers drag their feet, buy different products, and otherwise sell vehicles they want to sell, rather than consumers want to buy.

So I grant that it's theoretically possible for Tesla to build a car dealership model as a growth strategy that doesn't also suffer from the limitations of the current state of affairs, I believe that the combination of current accepted behavior plus dealership laws leads to a Tesla dealership strategy suffering from the same problems. More broadly, I believe a Tesla dealership system marks the end of Tesla as auto industry innovator and disrupter, and indicates that Tesla has joined business-as-usual. For my own investment in the company, it definitely marks a decision point whether to remain invested or not, with a bias towards selling.

When I was purchasing a vehicle that had very specific towing requirements (I had to be able to pull at a rating of 10,000lbs), the first dealer I went to lied about the specs of the on-lot truck. I was skeptical, so I crawled under the vehicle to check, and it was the wrong axle and tow hitch. I went to a second dealer and they lied about the towing capacity of the engine. A third dealer lied about yet another spec... all of this was to get me to buy a vehicle from the lot rather than use an online builder that would guarantee me a 3.92 axle, a class C hitch, and a 10k tow rating.

I would have gone straight to the online builder but, in a bizarre set of coincidences, the online build-your-own tool refused to allow me certain combinations of options. Ended up driving 150 miles to get one out of a wholesaler's lot with 500 miles on it. Hilariously enough, a car dealer had sold them the truck to get it off their lot.

Car dealerships are legalized con artists and I look forward to never having to deal with one ever again.

Click to expand...

This is an excellent example of misaligned incentives between dealers and consumers, and the problem this creates for the manufacturers. You don't mention it, but the manufacturer of your vehicle (or the manufacturers you considered), picked up a little bit of tar on their reputation as a result of your experience with "their" dealers. If you were buying directly from the manufacturer with the very specific requirements you had, there would have been none of that nonsense. They would have built or found a vehicle that exactly matched your specifications and provided it.

My experience with local owners is that they will do anything to sell you what they have on the lot even if it's not even close to what you want.
The only goal of the local owner is to make as much money as possible. He (and it's always a he) doesn't care about the brand or customer satisfaction or service.
The Tesla "pre-order" model is much better.

Click to expand...

Do you think that Tesla's store managers don't have a compensation system that includes sales volume? That the service heads don't have a compensation system that combines customer satisfaction and cost containment?

At some point Tesla will likely start building some inventory too, especially for active distant markets. I could see building some loaded black model Xs for China in anticipation of demand.

I'm not sure Tesla has the capital to develop what they consider second tier market opportunities. Smart local business people with a long view are one solution.

Do you think that Tesla's store managers don't have a compensation system that includes sales volume? That the service heads don't have a compensation system that combines customer satisfaction and cost containment?

At some point Tesla will likely start building some inventory too, especially for active distant markets. I could see building some loaded black model Xs for China in anticipation of demand.

I'm not sure Tesla has the capital to develop what they consider second tier market opportunities. Smart local business people with a long view are one solution.

Click to expand...

I don't think Tesla store managers are compensated on volume.
I don't think Tesla service heads are compensated on cost containment.

At some point, Tesla may get caught up enough to make cars for inventory but I don't know if they would since that would involve selling cars which were not exactly aligned with customer wants.

No one outside of the dealer cartel disagrees with the premise of the article, however the laws can't be killed until the state legislators who make the laws are no longer funded by the dealer lobby. Not going to happen.

No one outside of the dealer cartel disagrees with the premise of the article, however the laws can't be killed until the state legislators who make the laws are no longer funded by the dealer lobby. Not going to happen.

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It will when the dealers run out of money to give to the state legislators. You know what the public's sentiment is already regarding handing their $$$ to dealers. It'll take time, but as long as Tesla stays the course, it'll happen.

It will when the dealers run out of money to give to the state legislators. You know what the public's sentiment is already regarding handing their $$$ to dealers. It'll take time, but as long as Tesla stays the course, it'll happen.

Click to expand...

Not nearly fast enough though. Tesla has to walk a fine line here to keep from further antagonizing a giant (NADA) which has enough lobby power in the majority of states to really put the squeeze on Tesla. Like the articles author said, this needs a federal solution whether directly or indirectly by funding control mechanisms.

It still amazes me that in 2015 we're still stuck with this ridiculous framework. Car dealers are nothing more than con artists and the very thought of having to go to one makes me cringe, even for service...

I also hate dealing with the traditional car dealer, and salemen in general. However that being said they do serve a valuable function. They provide the capital to allow for a large network of sales and service location. Thats something that hurts Tesla, particularly with their refusal to let anyone but them work on the cars.

The other thing that capital allows for, and the author of that article seems to mis-understand, is the large inventory of on the lot vehicles. If you want a Tesla you've got to wait a few months. If you want a Chevy you can have one you want in a few days. Dealers don't hold those huge inventorys just to waste money, its because the vast majority of the population doesn't want to wait months for a new car.

I'm imagine Tesla is looking at some sort of dealership model as a growth strategy. I'm sure it would be fixed price. It is enormously difficult to manage and motivate a worldwide sales and support effort. Having the right local ownership is why franchising works.

It is a question of Tesla aligning their goals with the goals of a local owner. Especially in compensation.

Click to expand...

If the USA didn't have restrictive laws, I'd expect FM deals. But that's not the case, so Tesla will continue with its current approach.

I don't really care if the dealer network live or die. I've had excellent results buying cars for years now. The key in my success is research beforehand. I know more about the cars than the dealer, I also know the financial numbers. So they cannot BS me. I believe that killing off the dealer network will not happen anytime soon, at least not in our lifetime. Most people who walk in and buy a car just are not armed with the information they need.

Perhaps, but then that means dealers are preying on people that don't have the time or resources to do the research. And even then, there might be some dealer incentives that are hidden from you. Worse, if you want a low volume, high demand car, you might want to pay 'sticker' but good luck with that. We all saw what BMW dealers did with the i8. Mark-ups were $25k+.

Not nearly fast enough though. Tesla has to walk a fine line here to keep from further antagonizing a giant (NADA) which has enough lobby power in the majority of states to really put the squeeze on Tesla.

Click to expand...

I think the Dealer Cartels have their own fine line to walk, too. Lest they come down too heavy and start to lose their Nice-Guy-Next-Door / Sponsor-Of-The-Hockey-Team image. They can't afford to look like a deep-pocketed influence peddler or
...hold on. There's someone at the door.

It's easy to rag on dealerships for creating additional costs related to purchasing a vehicle and the generally poor experience people have. In fact, I agree. But the idea that there will be some massive reduction in prices to consumers as a result of a direct sale model is absurd. Companies will protect their distribution channels. I simply can not walk up to a company and get the wholesale price on a product even though I'm buying direct. Electronics, for example, are sold through a variety of "dealers" which make a profit selling that product. But although I can buy direct from the manufacturer, I can't do so for any less than I can from a big box retailer. In fact, sometimes it can be more expensive to buy from the manufacturer.

I also hate dealing with the traditional car dealer, and salemen in general. However that being said they do serve a valuable function. They provide the capital to allow for a large network of sales and service location. Thats something that hurts Tesla, particularly with their refusal to let anyone but them work on the cars.

The other thing that capital allows for, and the author of that article seems to mis-understand, is the large inventory of on the lot vehicles. If you want a Tesla you've got to wait a few months. If you want a Chevy you can have one you want in a few days. Dealers don't hold those huge inventorys just to waste money, its because the vast majority of the population doesn't want to wait months for a new car.

Click to expand...

Dealers don't want their capital tied up in that much inventory either. It's forced on them by the manufacturers who build too many cars and then have to create all kinds of gimmicks to sell them. Tesla doesn't need the vast majority of the population to buy its cars-- even when selling 500,000 cars per year it will still be a niche player in a market of 16 million cars sold in the U.S. each year. There must be at least 3% of car buyers who would be happy to wait for a Tesla when they can order exactly what they want and not have to spend hours at a dealership having their blood pressure raised.

It also doesn't take as much capital for Tesla to have sales and service locations as they don't take acres of land for car lots. For sales locations they rent a small store in a shopping mall, they don't build the mall!

I'm confused. I'm no fan of car dealers, but exactly how will eliminating dealers eliminate excess inventory? The dealers don't create excess inventory, the manufacturers do (and consumers who expect to walk in and buy the exact car they want). Even if the manufacturers owned all of retail outlets, the excess cars they build would still have to sit somewhere, and would still cost money.

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